Dollar Often Trades like its from a "Bizarro World"
March 9, 2012
An article by Alice Ross in Thursday’s Financial Times blames this year’s significantly diminished currency market turnover on the dollar’s choppiness and the persistence of its counter-intuitive movement. In truth, currency forecasting has never been straight-forward partly because the arena of foreign exchange reflects a multitude of factors, many of which lie in the realm of unknown unknowns. Far too often over the last 40 years, the dollar has seemed to be governed by the rules of the Bizarro World of Superman comics fame. In a Bizarro World, everything is perceived in flip-flop fashion and dependent variables react backwards to what one ordinarily would presume. So if engaged in a game such as foreign exchange trading, results tend to be optimized by doing intensive analysis but taking action opposite to the recommendations suggested by one’s research.
It’s easy to be bearish about the euro, an experiment in currency union riddled with enormous shortcomings and now caught in a trap with no long-term means of escape. Forecasts of parity against the dollar by end-2011 were popular at the start of last year. That didn’t happen, but late in the year, analysts were again anticipating a big drop during 2012.
Although depreciating in recent weeks, Japan’s currency has on balance strengthened 45% since the onset of the financial crisis in 2007 and is 94% higher against the dollar than its 1990 low. If not for the threat of Japanese intervention, the yen would be even more elevated now. In the 1960s, 1970s, and 1980s, Japan’s economy was on a growth tear and, similar to China now, thought likely to overtake the United States as the world leader. Values of the yen presumably hedged that possibility. Growth of less than 3.0% happened so infrequently back then that Japan used 3.0%, not 0%, as the bar for identifying recessions.
All signs over the past 20 years suggest the yen ought to have weakened during this interim. Japan’s huge and chronic current account surplus has disappeared, and deficits are the new new there. The Bank of Japan can’t rid the economy of deflation. Real growth since 1994 has averaged only 0.8% per annum since 1994. Long and short-term interest rates have been lower than elsewhere since the early 1990s, and nobody has a bigger fiscal deficit relative to GDP. The Nikkei is 74.5% weaker than its all-time peak hit at the end of 1989. Japan experienced the mother of natural disasters a year ago this weekend, and the political process has been habitually dysfunctional.
As one looks to the future, a depreciating euro offers one of very few sources for securing desperately needed economic growth. The euro area has higher unemployment and less economic growth than the United States. The bloc’s largest economy has unsuitably low interest rates. The region is more dependent on imported energy than the United States. The transition of Japan’s current account from surplus to deficit, unlike when this last happened some 30 years ago, appears enduring, not transitory. The United States has its own political and economic problems, such as fiscal uncertainty, renewed growth in the U.S. trade deficit, and a pre-announced ultra-loose monetary policy through at least late-2014. Nonetheless, fundamental economic analysis on balance argues for strengthening dollar trends against both the yen and euro. Or does it? A Bizarro trading strategist might instead see now as an opportune time to sell dollars, particularly after today’s dip of the dollar versus its two rivals.
The complaint about the dollar lacking a trend element is supported by empirical evidence but only to a limited extent. The table below shows the width of the dollar’s high-low ranges against the euro and yen. These were lower in 2011 because the years 2008 through 2010 had elevated dispersions. Compared to earlier shown years, 2011 does not look particularly abnormal, and the trading bands over the first fifth of 2012 show decent widths that extrapolated point to normal properties in 2012.
| High-Low Band width | EUR/USD | USD/JPY |
| 2006 | 13.2% | 10.0% |
| 2007 | 16.3% | 15.8% |
| 2008 | 30.1% | 28.6% |
| 2009 | 21.6% | 19.6% |
| 2010 | 22.8% | 18.4% |
| 2011 | 16.2% | 13.2% |
| 2012 | 6.8% | 8.4% |
It tends to take a prohibitively powerful argument to make me bullish on the dollar beyond a period of a quarter or two. Slam dunk buying or selling situations prove all too often much better in theory than practice. Then there is the dollar’s long-term track record. Outside of the early 1980s and late 1990s, one doesn’t find multi-year periods of dollar appreciation. In comparison to its levels in 1970, 1980, 1990 and 2000, the dollar is weaker, not stronger, now against the yen and D-mark translation value of the euro. To President Obama’s credit, the dollar is marginally stronger against the euro than when he took office, but I wouldn’t count on it still showing a net advance when January 20, 2013 comes around, let along January 20, 2017.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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